GBP/CAD Forecast for the Week Ahead

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>The Pound is at risk of breaking out of its range and continuing higher against the Canadian Dollar in the week ahead.

The Pound-to-Canadian Dollar exchange rate has been rising ever since the start of 2018 but since roughly the middle of January it stalled, started going sideways and has now formed a distinct boundaried range between the highs at 1.7650 and lows at 1.7300.

Our technical studies of the exchange rate suggest the rally, followed by the sideways move looks like it may have formed a pattern known as a bulish flag. This offers some interesting clues as to future price action.

Flag patterns normally break higher and are expected to move as far as the 'pole' part extrapolated higher from the base of the flag square, as shown in the diagram below:

(Image courtesy of dailyfx.com)

If GBP/CAD has indeed formed such a flag then it will probably break higher soon and move up as far as 1.8000 potentially.

A break above the range highs, confirmed by the exchange rate trading above the 1.7667 highs would signal a continuation up to an initial target at the 1.7840 May highs.

Major highs can provide significant obstacles as they are often levels where supply increases due to traders, who betted wrongly on the market going higher just before the major high, liquidating after holding onto their losing positions for a long period.

These traders are usually so relieved the market has rallied back up to their entry price that they would rather close their positions in order to breakeven than hold onto their longs in the hope the market will go higher again and tempt fate a second time.

If the rally continues above the May highs, however, it could move all the way up to the next target at 1.8000, which is a major round-number and therefore a place where traders are more likely to take profit.

At Scotiabank FX strategist Shaun Osborne is also bullish based on a technical analysis of the pair.

"The underlying bull trend in the GBP remains intact but the market’s sharp tumble from the upper 1.74 area two weeks ago leaves a fairly significant dent in the weekly chart (a bearish “shooting star”) and trend strength, while bullish still on the daily and weekly charts, is weakening," he says in a recent technical note on the pair.

"We remain longer term bulls here but feel the GBP risks slipping back somewhat in the next few weeks as the late 2017 rally corrects. We prefer to buy dips to the 1.65 arear from here," he adds.

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Data and Events for the Canadian Dollar

The main data release for the Canadian Dollar in the coming week is Manufacturing Sales out at 13.30 GMT on Friday, February 16.

This is forecast to show a 0.3% rise month-on-month in December after a fairly robust 3.4% rise previously.

The economy in Canada is quite strong and analysts have a positive outlook for the currency yet the main risk factor for the Canadian Dollar is that NAFTA trade talks with the US and Mexico break down.

News regarding how the talks are progressing may also, therefore, impact on the GBP/CAD pair.

Data and Events to Watch for the Pound

From a data perspective inflation and retail sales, releases dominate the outlook for the Pound in the week ahead.

Inflation is a driver of interest rates which in turn influence the Pound, so a rise in inflation will lead to a stronger Pound. On Thursday, February 8 the Pound rallied as the Bank of England communicated that interest rates might have to rise faster than previously anticipated in coming months in order to combat persistently high rates of inflation.

The Bank and markets alike will, therefore, be watching the latest installment in UK inflation data to see where the trends lie, the release is due out on Tuesday, February 13, at 9.30 GMT.

Forecasters expect a 2.9% rise compared to a year earlier (yoy); in the previous month of December, the inflation rate was a higher-than-expected 3.0% (yoy).

On a monthly basis, inflation is expected to decline by -0.6% in January.

Core inflation, which strips out volatile food and fuel components, is forecast to rise by 2.6% compared to 2.5% previously; often it is this number that moves markets.

On all accounts, should the data come in below expectation we would expect Sterling to decline, and should data beat expectations we would expect Sterling to rise.

The other main release is retail sales, which is scheduled for release on Friday, February 16, at 9.30.

A higher-than-expected result could reaffirm the UK economy's resilience and support Sterling.

Retail Sales is forecast to rise by 2.6% in January compared to a year ago when it only gained by 1.4%. Month-on-month it is forecast to increase by 0.5% from -1.5% previously.

"Looking ahead, the UK's inflation and retail sales reports are scheduled for release and if the data surprises to the downside like we expect, it may be difficult for GBP to rally," says Lien.

Data aside, the other major factor for Sterling in the coming week is likely to be how Brexit negotiations evolve.

The Pound fell last week following the revelation that the EU was reconsidering whether to allow the UK a two-year transition phase deal after the official Brexit deadline in 2019, in order to help negotiate a new trade relationship.

After a breakdown in talks over the nature of the UK's rights during the transition period itself, Chief EU Brexit negotiator Michel Barnier said that if the disagreements continued it was "not a given" the UK would even get a transition period at all.

This took the wind out of Sterling's sails after it rose strongly following the Bank of England's positive assessment of the economy on Thursday.

"Instead of making progress this week, Brexit negotiations have taken a step back and to the dismay of sterling bulls, this overshadowed the BoE's hawkishness," concluded Lien.

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